Lately the noise about risks eased. The EU and UK agreed on a further extension of Brexit in mid-October, and trade talks between US and China are currently promising. But these may be short-term effects and could reverse quickly. Central banks around the globe maintain their expansive route to counter weak economic activity and low inflation.

Last Wednesday the FED cut rates by 25bp, the third consecutive time this year, and in line with expectations. The post-meeting statement dropped the phrase that stated the FED will act as appropriate to sustain the expansion. Furthermore, it will simply assess the appropriate path for interest rates based on incoming information. In other words, the FED is done with the “insurance cuts” and will remain on hold, unless things happen that cause the FED to materially reassess its outlook, in which case it will act accordingly. So far, no surprises and expected by the markets. However, even though the US economy continues to be robust, the recent economic data show certain signs of weakness. In September, retail sales shrank again for the first time in six months and the highly regarded ISM Manufacturing Index fell to its lowest level since 2016. But falling unemployment, higher wages and good consumer sentiment make a sustained weakening of private consumption appear unlikely. Next year analysts expect growth to slow down to 1.8%, after over 2% this year. Recessionary fears are still far away.

Turning to the Eurozone, outlook remains deflating. The most important leading indicators are pointing downwards, signalling a sustained economic slowdown. The PMI fluctuates around the threshold of 50 points (signalling stagnation). In Germany, it even looks as if the largest economy in the Eurozone will fall into a technical recession. This is mainly due to the crisis in the industry sector. The new ECB President, Ms Lagarde, is therefore facing a difficult task.

In fixed income markets, we expect the credit spreads to widen further across tenors due to supply pressures. Government bond valuations remain expensive and suggest limited potential returns. In EUR corporate IG universe, more than 40% of the bonds yield negatively. However, European HY markets have rallied this year and have shown a similar pattern those to the US. Further rise in yields requires an economic upturn what we doubt in the short term and hence stay neutral.

Equity earnings season provided surprisingly some tailwind. In the run-up to the event, analysts feared a YoY decline in profits of just under 4% for US companies. Now a slight increase can be expected. This implies the companies had done a good job before the reporting season to dampen expectations. Fears that the outlook might become gloomier have not yet been confirmed either. Known geopolitical and economic risks eased and no significant downturn adjustments are being made to profits or sales. Hence, we increase our equity exposure from underweight to neutral.

Despite the recent appreciation of EUR/USD, the pair is still at risk. The relative economic surprise indicators and the US still holds the highest short-term interest rates in G10, should favour USD over EUR. Gold Gold is flattish on a monthly basis with risks to the upside once the geopolitical tensions intensify. We prefer to buy on dips around USD 1450 per oz. Oil stays under pressure due to the swelling inventories globally along with modest demand growth. Meanwhile, forecasts for colder weather in the US continue to boost natural gas prices.

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